PART-B

STATEMENT OF THE PROBLEM The working capital is the most critical problem in financial management. Importance of working capital management stems from two reasons viz., A substantial portion of total investment is invested in current assets. Level of current assets and current liabilities will change quickly with the variation in sales. Hence the study of working capital position in the company is needed to understand the concepts adopted by the top management. The main objectives of the Study To understand the theory part of working capital management. To understand the nature of the working capital management in Vega Auto Accessories.. To analyze the effectiveness of working capital management through financial statements and ratios To analyze the effectiveness of working capital management by evaluating each component of the working capital. To understand the various sources of working capital and related strength and weakness of working capital of Vega Auto Accessories.s. To evaluate an effective working capital strategy for the company in the light of the research findings. To study the changes in working capital over a period of 5 years. To study the efficiency and effectiveness of working capital management of the company. To know the profitability position of the company. 1.3 SCOPE OF\WORUNG CA1ITALMNAGEMENT The scope of working capital management lies in testing of short run solvency and on the effectiveness with which the business is conducted. Tests of receivables and inventory should be regarded primarily as relating to solvency rather than to efficiency. Standards of turnover always are held as tentative for the final test of effectiveness of business management.

IMPORTANCE OF THE STUDY In recent years, working capital management gained importance for a number of reasons some of them are mentioned below: The volume of resources deployed in current assets are huge in most of the industry and the cost of capital required to finance is also more The capital assets are more easily manageable in the sense that level are competitatively for shorter period and a wrong steps can more easily retrieved without causing much damage A little change in the purchasing and stocking programmer would make a lot of difference in the investment of fund in raw material and finished goods 1.4 METHODOLOGY Methodology consists of different techniques adopted in data collection. Much needed information for the study was collected through various means. Location of the Study The study was conducted at Vega Auto Accessories.s ltd, Metagalli, K.R.S. Road, Mysore - 5710016. The study was done in the finance department of the Vega Auto Accessories.s ltd. Duration of the Study The duration of the study was six weeks. Data Collection Method In order to fulfill the objectives of the study, the data was collected from primary and secondary sources. Primary Source Discussion with HR Manager. Discussion with accounts manager and other departments executives. By personal observation of the activities of organization. Interview with the accounts staff members.

Secondary Source Annual report for the past 5 years Journals, magazines Newspapers Internet Analysis The data collected for the study of working capital management is analyzed through general analytical method. Ratio analysis is used for the purpose of the analysis is depicted in tables and graphs. Tools and Techniques There are several tools of analyzing working capital, they are Statement of changes in working capital. Working capital ratios. 1.5 LIMITATION OF THE STUDY As we have no access to other records except the annual reports the interpretations of the study is not complete. The study is purely of academic interest. The inexperience makes the analysis less precious when compared to professional analysis. Hence conclusions from analysis of statement are not sure indicators. The study in this project does not solve into the problems of capital budgeting, fund flow analysis, tax and finance planning, foreign exchange, management and treasury operations. The study is limited as it being a study of static positional Figures and is not a study of patters of peaks and tough. Through a complete attempt has been made to include all the factors affecting the case study putting into writing, there is every possibility of some factors being left out due to the shortage of time and some due to the policy of the management to keep them confidential.

LITERATURE SURVEY
REVIEW OF LITERATURE 2.1 SEVEN STEPS TO ELEVATING WORKING CAPITAL PERFORMANCE The following seven steps serve as an effective roadmap for corporations looking to squeeze the highest returns from global working capital management. Concentrate on Free Cash Flow as a Performance Metric to Drive the Organization Forward. Integrate Credit Risk, Receivables and Payables Management from a Performance Management, Process Automation and Cross-enterprise Collaboration Standpoint. Drive Cost Containment and Standardization with Finance Shared Services and Outsourcing. Take a Holistic Approach to Cash Flow Forecasting and Short-term Liquidity Management. Understand that Risk Management is a Critical Part of Cash Flow Processes, and Take Steps to mitigate it. Close the Gap between Customers, Credit and Receivables, Sales and Treasury. Leverage Specialized Technology to Reap Sustainable Benefits. (Source: Veena Gundavelli, Applied Finance, March 2006) 2.2 WORKING CAPITAL MANAGEMENT PRACTICES IN IDBI ASSISTED TUBE AND TYRE COMPANIES Working capital management is concerned with the problems that arises in all employ to manage current assets and current liabilities and the inter relationship that exist between them. 1DB! provided financial assistance to six tube and tyre companies of India, out of them five are profit making. The following are the some of the working capital management practices have been followed by 1DB! assisted tube and tyre companies.

 The short term liquidity position of the 1DB! assisted companies in terms of current ratio and quick ratio can be considered good as compared to tube and tyre industry as a whole, yet the IDBI assisted companies never satisfy the standard norms of these ratios throughout the study period. The tube and tyre industry succeeds in the effective use of working capital in terms of sales as compared to the IDBI assisted Tube and tyre companies. It can be observed through the mean working capital turnover ratio. Approximately one third of the current assets is invested in the form of inventory in both the 1DB! assisted companies and the tube and tyre industry in India. Approximately 60% of the current assets are invested in the form of trade receivables by tube and tyre industry in India. One major inference is more than 93% of the current assets are in the form of inventory and trade receivables and the remaining part (7%) is in the form of cash and bank balance and the other current assets. 1DB! assisted companies followed of much liberal policy as compared to tube and tyre industry in India, which is a clear from the mean average collection period. The overall working capital management of the IDBI assisted companies and the tube and tyre industry can be considered effective, as clear from the calculated Y score which has been more than cut off point throughout the study period. But tyres and tubes industrys working capital management can be considered more effective rather than the 1DB! assisted companies as clear from the Y score. (Source: Dr. D.S. Chundawat & Dr. Shurveer Singh Bhanawat, The Management Accountant, Feb. 2000) 2.3 GUIDING PRINCIPLES ON THE STRUCTURAL ASPECT OF WORKING CAPITAL MANAGEMENT The working capital management involves in one side, that of optimizing working capital investment and in other sides that of determining the quantum of investment in each component of the same capital.

The following are the some of the guiding principles on the structural aspect of working capital management. The first one is the relationship between the level of working capital and sales. It states that if working capital is varied relative to sales, the amount of risk that a firm assumes is also varied and the opportunity for gain or loss increases. A positive relationship exists between the working capital and the sales. Therefore, when the level of working capital relative to sales decreases, the opportunity for gain from the investment increases and the opportunity for loss also increases. The second principle is concerned with the ideal level of working capital. It states that investment in each component of working capital may continue so long as the equity position of the firm increases. It implies that investment in working capital is to contribute to the increase in the net worth of the firm so that the business risk is minimized. The third principle deals with the risk resulting from the type of capital used to finance current assets. According to it, the type of capital used to finance the working capital directly affects the amount of risk that a firm assumes as well as the opportunity for gain or loss and the cost of capital. Generally, the cost of equity capital is greater than the cost of debt capital. The last principle relates to the matching of maturities of payables with the flow of internally generated fund. According to it, the lenders of short-term funds are interested to the firms repayment capacity and not to the earnings. Therefore, a firm should try to synchronize the date of maturities of short-term instruments with the flow of internally generated funds. (Dr. Anjan Kumar Ghatak, The Management Accountant, Sep. 2000) 2.4 WORKING CAPITAL - A TOOL TO CONTROL - OPERATIONS No business organization can operate without Working Capital. Working Capital in real sense means the requirement of funds to run the day-to-day business. It is the grease that keeps the activities/operations of organization running. Working capital as a tool to control activities of operations. Control of operation is elimination of unwanted activities/inventories and having fast movement of inventories.

Controlled Operations have Two following Powerful benefits It reduces requirement of working capital. Faster production and delivery of goods enable the organization to acquire new business. Effort of reducing working capital is a continuous exercise and it is an opportunity for improvement. All the managers should try to sort-out the problem arising due to this. Every organization should institutionalize the process of collating and reporting working capital information to top management and top management should review these statements regularly. It is suggested that the responsibility of reporting should be given to persons other than operating managers so that operating managers can utilize the time available to act on the information collected. And the controlling of working capital is a team effort and not one-man show. (Source: Ajai Kumar Agarwal, The Management Accountant, Sep 2000) 2.5 MANAGEMENT OF WORKING CAPITAL IN SELECTED COOPERATIVES IN BOTSWANA Good corporate governance is now been considered as an urgent and important activity in most countries due to the move towards global competition and the pressure for privatization. This calls for most effective management of business assets. Financial management practices do provide a sound and effective framework for management of assets. It has been observed that investment in fixed asset has been receiving more emphasis in both management area and research. On the other hand effective working capital management, which has been receiving little attention from researchers, will yield more significant results and for this reason demands more serious attention from researchers and management. (Source: C.R. Satyamoorty, Finance India, Sep 2002)

2.6 EFFICIENCY OF WORKING CAPITAL MANAGEMENT IN INDIAN PUBLIC ENTERPRISES DURING THE POST-LIBERALIZATION ERA The NTPC achieved a higher level of efficiency in managing its working capital during the post-liberalization era by adopting itself to the new environment emanated from liberalization, globalization and competitiveness. It improved its liquidity status very significantly in the post-liberalization period as compared to the pre-liberalization period. Although the average working turnover in the post- liberalization period was slightly higher than that in the pre-liberalization era, the efficiency in working capital management of the company on the whole indicated the partial regression coefficients marked a considerable improvement in the post liberalization period. (Source: Amir Jafar & Debasish Sur, The ICFAI University Press, 2006) 2.7 LIQUIDITY MANAGEMENT CORPORATION LIMITED OF HINDUSTAN PETROLEUM

Liquidity management is the most essential component of the financial management. It plays most dominant role in the successful functioning of an enterprise. The liquid assets may be defined as the money and assets that are readily convertible into money different assets may be said to exhibit different degree of liquidity. The company should have sufficient liquidity otherwise it may not be in a position to meet its commitments and thereby may loose its creditworthiness. (P.C. Narware & Vivek Sharma, The Management Accountant, Mar 2004) 2.8 WORKING CAPITAL MANAGEMENT IN OIL INDUSTRY IN INDIA The management of working capital is one of the most important aspects of the overall financial management. The existence of an adequate working capital and its careful management can make substantial difference between the success and failure of an enterprise. Even in a well-established business with a long history of successful operation, careful attention to the management of working capital can result in greater profitability. It is important, therefore, for management to pay particular attention the planning and control of working capital. (Source: Surendra S. Yadav, P.K. Jam, The Management Accountant, July 2001)

2.9 A COMPARITIVE STUDY OF WORKING CAPITAL MANAGEMENT IN CO-OPERATIVES AND PRIVATE SECTOR COMPANIES IN SUGAR INDUSTRY OF TAMIL NADU. CAPITAL is the limited productive resource in developing economies and proper utilization of these resources promotes the rate of growth, cuts down the cost of production and above all improves the efficiency of the productive system. The total capital of a country comprises fixed capital and working capital. Fixed capital investment generates production capacity whereas working capital makes the utilization of that capacity possible. Working capital has acquired a great significance and sound position for the twin objectives of profitability and Liquidity. (Source: A. Vijayakumar, Finance India, 1998) 2.10 BORROWING AS A SOURCE OF FINANCING WORKING CAPITAL IN THE CORPORATE SECTOR IN INDIA Working Capital is taken to be the life-blood of a business. Lack of working capital may lead a business to technical insolvency and ultimately to liquidation. That is why, the working capital management of a firm is considered to be one of the most important tasks of financial managers. Working capital management involves decisions relating to current assets including decisions about how these assets are to be financed. (Source: Chhabi Majumdar, Finance India, Mar 1996) 2.11 WORKING CAPITAL MANAGEMENT IN INDIAN FARMERS FERTILISER COOPERATIVE LIMITED The working capital management refers to management of the working capital or to be more precise the management of current assets. A firms working capital consists of its investments in currents assets which include short-term assets such as cash and bank balance, inventories, receivable and marketable securities. So the working capital management refers to the management of the level of all these individuals currents assets. (Source: S.K. Khatik & P.K.Singh, The Management Accountant, 2004)

2.12 WORKING CAPITAL MANAGEMENT- A STUDY OF SELECTED STATE ENTERPRISES OF KARNATAKA The working of the public sector in India has been criticized heavily for various reasons since the beginning. During the fifties, the rationale for the existence of the public sector was questioned and deliberated at great length. In the sixties and seventies, the criticism was aimed more towards the proliferation of the number of undertakings with a lax control of their functioning and a lick of clear policies on various issues. A number of financial and non-financial problems have been said to be the reasons for non-performance of the Karnataka enterprises. Of all these it is the imprudent management of working capital that is assumed to be the single determining factor contributing to the unsatisfactory performance. (Source: N. Chinta Rao, finance India, Dec 1993) 2.13 WORKING CAPITAL MANAGEMENT: A CASE STUDY OF HINDUSTAN LEVER LTD. Management of working capital has always been a fascinating subject from the academic point of view and it must be admitted that in the real world situation also, efficiency with which working capital is managed in a concern is of great significance for its overall well beings- its growth or decline. The relative importance of working capital varies from industry to industry. A firm in the capital goods industry may have relatively a lower percentage of the total investment in the current assets than what has to be blocked up in fixed assets. From that point of view working capital management assumes a greater importance in consumer goods in industry, trading firms etc. (Source: Amit K. Mallick & Debasish Sur, Finance India, Sep 1999) 2.14 WORKING CAPITAL AND LIQUIDITY MANAGEMENT IN FACTORING: A COMPARATIVE STUDY OF SBI AND CANBANK FACTORS Working capital is considered as lifeblood in human body. It is a capital required to operate business on day-to-day basis and it varies according to the nature of business, production, sales policies, turnover, credit period, collection period, etc. Broadly working capital management can be described as the administration of all aspects of current assets and current liabilities. Liquidity means the capacity of the

firm to convert the assets into realizable value in money. It measures the ability of the firm to honour all the maturing obligations. Profitability is the rate of return on firms investment. It implies that return on firms investment. It implies that return made on investment of fixed and current assets. (Source: Y.V. Reddy & S.B.Patkar, The Management Accountant, May 2004) 2.15 WORKING CAPITAL MANAGEMENT IN VST - AN APRAISAL Liquidity is a complex phenomenon. Management of liquidity is probably the most important survival skill required in financial management. In the absence of adequate liquidity firms become technically insolvent and the rest of the apparatus of financial analysis becomes redundant. Inadequate and excess working capital are the two extreme of the continuum of liquidity management. While inadequate working capital results in risk of inability in meeting payments schedules, excess working capital adversely effects the profitability. A sound and systematic approach to the working capital management should ensure trade off between liquidity and profitability. (Source: M. Subramanya Sarma & Thiruvengala Chary, Mar 1999) 2.16 A STUDY ON WORKING CAPITAL MANAGEMENT IN NON- BANKING FINANCE COMPANIES Working capital is an integral part of the over all corporate finance. Working capital is of important for efficiently carrying out the day-to-day operations of every organization. In all concerns, the problem of effective working capital management is of paramount significance, as considerable amount of funds are invested in the form of various current assets. In the absence of proper and efficient management of working capital, it would be difficult to achieve the basic objective of its organizational efficiency. (Source: P.Saravanan, Sep. 2001, Finance India) 2.17 FINANCIAL LEVERAGE, EARNINGS AND DIVIDEND Financial leverage is primarily concerned with the financial activities, which involve rising of funds from the sources for which a firm has to bear a fixed charge. These sources include long-term debt and preference share capital. Long-term debts capital carries a contractual fixed rate of interest and its payment is obligatory. As the

debt providers have prior claim on income and assets of a firm over equity shareholders, their rate of interest is generally lower than expected return equity shareholders. Further interest on debt capital is a tax-deductible expense. These two phenomena lead to the magnification of rate of return on equity capital and hence EPS. It goes without saying that the effect of changes in EBIT on the earnings per share is shown by the financial leverage. Financial leverage can best be described as the ability of a firm to use fixed financial charges to magnify the effect of changes in EBIT on the firms earning per share. (Source: Santimoy Patra, The Management Accountant, June 2004) 2.18 WORKING CAPITAL PERFORMANCE OF CORPORATE INDIA Management of working capital is a value creating exercise, since unlocking assets tied up in working capital could immediately increase operating cash flows, which, if used profitably, could lead to an improved profit after tax (PAT) and could enhance shareholders wealth. The objective is to mange the firms current assets and non-interest bearing current liabilities to achieve an optimal balance between profitability and risk, and create firm value. A well-designed and well-implemented working capital management must contribute positively to the creation of a firms value. Too much investment in inventories and receivables provides comfort of liquidity but reduces profitability. Too little investment in them or aggressive working capital financing strategy increases the risk of not being able to meet the commitments as and when they become due. A popular measure of working capital management is Days Working Capital (DWC), also known as cash conversion cycle. A firm may strategically design a long cash conversion cycle to have increased sales and better firm profitability. However, the firm profitability may suffer if the cost of financing the working capital needs exceed the benefits of maintaining a higher liquidity position. (Source: Manoj Anand & Keshav Maihotra, The ICFAI University Press, 2007) 2.19 A GOAL MANAGEMENT PROGRAMMING MODEL FOR WORKING CAPITAL

Working capital management holds an important place in the theory of finance. A large number of models, theories and techniques have been developed in

the past towards the optimal allocation of funds, but most of the models, theories and techniques both mathematical and non-mathematical on working capital decisions of a firm developed so far have assumed the attainment of a single objective that is cost minimization or profit maximization or maintaining fair degree of liquidity etc. The goal-programming model permits a simultaneous solution of incommensurable objectives without having to reduce them to a single dimension. It can also permit a solution of conflicting objectives, and still yield a satisfying solution. Linear programming, and many such cases, would yield an infeasible solution. The goal programming approach can be used to obtain a solution to a problem involving (i) a single objective only (ii) a single objective with multiple sub- objectives (iii) multiple objectives (iv) multiple objectives with multiple sub- objectives. (Source: J.D. Agarwal, June 1998, Finance India) 2.20 WORKING CAPITAL AND PROFITABILITY Working capital and management and profitability of the company disclosed both negative and positive association. In conventional production function approach for determination of relationship between output and profit, fixed capital is taken into account as explanatory variable amongst others, the role of working capital is ignored. It is therefore felt that there is the need to study the important role of working capital in profit generating process. If a company desires to take greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sale volume, therefore of profitability. Hence, a company should choose between liquidity and profitability and decide about its working capital requirements. The impact of working capital on profitability has been examined by computing co-efficient of correlation and regression between profitability ration and working capital ratio. (Source: P.C. Narware, Management Accountant, June 2004)

THEORITICAL ASPECT OF WORKING CAPITAL The finding of the present study titled, A study on working capital management at Vega Auto Accessories.s Ltd., is presented and discussed in this chapter. INTRODUCTION TO WORKING CAPITAL Working capital may be regarded as the lifeblood of a business. Working capital management is an important aspect in the study of financial management. The goal of working capital management is to maintain the firm current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and

may even be forced into bankruptcy. The interaction between current assets and current liabilities is therefore, the main theme of the theory of working capital management. Definition of Working Capital Working capital can be defined as the excess of current assets over current liabilities. Current assets are those assets, which can be converted into cash within the current accounting period and current liabilities are the debts of the firm that have to be paid during the current accounting period or within a year. According to Prof. HARRY G GUTHAMAN and HEBERT I DANGALL, Working capital is the excess of current assets over current liabilities. But J.E.BEGAN states as the portion that circulates from one firm to another firm in the ordinary conduct of business. Concepts of Working Capital The working capital can be classified into two concepts: Gross working capital Net working capital Gross Working Capital It refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory). Net Working Capital It refers to the difference between the current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. MANAGEMENT OF WORKING CAPITAL ENCOMPASSES THE FOLLOWING PROBLEMS Problems of deciding the optimal level of investments in current assets. Problems of deciding the optimal mix of short-term funds in relation to long- term capital. Location of sources of short-term financing. The study of working capital management is incomplete unless we have an overlook on the management of current liabilities.

Need for Working Capital Working capital is generally required to meet day-to-day requirement like purchase of raw materials, payment of salaries, payment of wages and meeting other expenses. The need for working capital to run the day-to-day business activities is a must. Therefore every firm requires a certain amount of working capital to meet its obligations. The basic objective of financial management is to maximize shareholders wealth. This is possible only when the company earns sufficient profit. The amount of such profits largely depends upon the magnitude of sales. However sales do not convert into cash instantaneously. There is always a time gap between the sales of goods and receipts of cash. Working capital is required for this period; the company will not be in a position to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to sustain the sales since it may not be in a position to purchase raw materials, pay wages and other expenses for manufacturing the goods to be sold. SOURCES OF WORKING CAPITAL The following are the major sources of working capital Accruals Trade credit Working capital advance by commercial banks Regulation of bank finance Public deposits Inter-corporate deposits Short-term loans from financial institutions Rights debentures for working capital Commercial paper Factoring METHODS OF ESTIMATING WORKING CAPITAL REQUIREMENTS: There are two methods usually followed in determining working capital requirements. They are: a) conventional method b) operating cycle method a) CONVENTIONAL METHOD: According to the conventional method cash inflow and outflows are matched with each other greater emphasis is laid on liquidity and greater importance is attached to current ratio, liquidity ratio etc., which pertain to the liquidity of the business.

b) OPERATING CYCLE METHOD: In the words of O.M. Joy: the operating cycle refers to the length of time necessary to complete the following cycles of events. Conversion of cash into raw materials. Conversion of raw materials into working process. Conversion of work in process into finished goods. Conversion of finished goods into debtors or bills receivables through sales. Conversion of debtors or bills receivable into cash. The process of this cycle will repeat again and again over the period depending upon the nature of business and types of product etc. this can be represented in a figure as follows:

The operating cycle shown in the figure above relates to a manufacturing firm where cash is needed to purchase raw materials and convert raw materials into work in process and then, work in process is converted to finished foods. Finished goods will be sold for cash or credit and ultimately debtors will be realized. The non-manufacturing firm, such as wholesaler and retailer will not have manufacturing phase, they have rather direct conversion of cash into finished stock, into accounts receivable and then into cash. The operating cycle of a non manufacturing firm is shown in fig.

Determination of operating cycle is helpful for control purposes with a view to improve previous working capital ratios. Secondly, this analysis emphasizes the total time lag within the operating cycle by indicating relative significance of its constituent parts. Thirdly, it provides a series of days equivalents, which can be used in budgeting of forecasting for translating sales and budgets of working capital value DETERMINANTS OF WORKING CAPITAL The following are some of the factors, which generally influence the working capital requirements of firms. Nature of Business Working capital requirements of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small investment in fixed assets, but require a large sum of money to invest in working capital. Retail stores, for example, must carry large stocks of a variety of goods to satisfy varied and continuous demands of their customers. Some manufacturing businesses, such as tobacco manufacturers and construction firms, also have to invest substantially in working capital and a nominal amount in fixed assets. Sales and Demand Conditions The working capital needs of a firm are related to its sales. It is difficult to precisely determine the relationship between volume of sales and working capital needs. In practice, current assets will have to be employed before growth takes place. It is, therefore, necessary to make advance planning of working capital for a growing firm on a continuous basis.

Technology and Manufacturing Policy The manufacturing cycle comprises of the purchase and use of raw materials and the production of finished goods. Longer the manufacturing cycle, larger will be the firms working capital requirements. Credit Policy The credit policy of the firm affects the working capital by influencing the level of debtors. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. The firm should use discretion in granting credit terms to its customers. Availability of Credit The working capital requirements of a firm are also affected by credit terms granted by its creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly, the availability of credit from banks also influences the working capital needs of the firm. A firm, which can get bank credit easily on favourable conditions, will operate with less working capital than a firm without such a facility. Operating Efficiency The operating efficiency of the firm relates to the optimum utilization of resources at minimum costs. The firm will be effectively contributing in keeping the working capital investment at a lower level if it is efficient in controlling operating costs and utilizing current assets. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization of resources improves profitability and thus, helps in releasing the pressure on working capital. Price Level Changes The increasing shifts in price level make functions of financial manager difficult. He should anticipate the effect of price level changes on working capital requirement of the firm. Generally, rising price levels will require a firm to maintain higher amount of working capital. Same levels of current assets will need increased investment when prices are increasing. However, companies, which can immediately revise their product prices with rising price levels, will not face a severe working capital problem. BALANCED WORKING CAPITAL POSITION The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from the firms point of view. Excessive working capital means idle funds which earn no profits for the firm. Paucity of working capital not

only impairs the firms profitability but also results in production interruptions and inefficiencies. The Dangers of Excessive Working Capital are as follows It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses increase. It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits. Tendencies of accumulating inventories tend to make speculative profits grow. Excessive working capital may lead to carelessness of cost of production. Dangers of Inadequate Working Capital It stagnates growth of the firm. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. It becomes difficult to implement operating plans and achieve the firms profit target. Operating inefficiencies creep in when it becomes difficult even to meet day- to-day commitments. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus, the firms profitability would deteriorate. Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. The firm loses its reputation when it is not in a position to honour its short- term obligations. As a result, the firm faces tight credit terms. Advantages of Maintaining Adequate Working Capital Cash discount from suppliers. Liquidity and solvency can be maintained. Meeting unforeseen contingencies. High morale of executives. Good bank relation. Fixed assets efficiency can be increased. Expansion can be facilitated. Profitability will increase. Research and innovation programs can be undertaken. Goodwill and borrowing capacity will be high.

WORKING CAPITAL MANAGEMENT Working capital management refers to the administration of all aspects of current assets, namely cash, marketable securities, debtors and stock and current liabilities. Components of Working Capital Management 1. Management of cash and marketable Securities Cash is the most important current assets for the operation of the business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The management of cash raises similar issues to those raised in relation to the management of stocks. There are costs involved in holding too much cash (e.g. investment opportunities foregone, loss of purchasing power during a period of rising prices etc) and also costs in holding too little cash (e.g. interest costs, lost goodwill etc). Thus, there is a need for careful planning and monitoring of cash flows overtime. 2. Receivables Management The term receivables mean the amount due from the debtors. They also include the bills receivables. An efficient management of these receivables is necessary because it involves a large amount of investment in current assets. It is fund that 1/3d of the current assets and nearly 11% to 15% of total assets are constituted by these receivables. In order to keep current customers and attracts new ones. Most manufacturing firms find it necessary to offer trade credit. Trade credit thus creates receivables as book debts, which the firm accepts to collects in near futures. A lucrative credit period increases sales and also the debtors. 3. Inventory Management Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60% of current assets in public limited companies in India. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is, there fore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a company to reduce its levels of inventories to a considerable degree, e.g., 10% to 20%, without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in excessive inventories carries a favourable impact on a companys profitability.

ANALYSIS AND INTERPRETATION

OBJECTIVE: 1 3.1 TO STUDY THE CHANGES IN WORKING CAPITAL OVER A PERIOD OF 5 YEARS 3.1.1 Analysis of Working Capital The financial management always tries to maintain an adequate working capital at every time, so as to carry on day-to-day operations of the firm successfully and economically. These are dangers in having too little or too more working capital. Therefore a through scouting into the current assets and current liabilities is to be made to control the working capital. The working capital balance of a concern has a positive value but often due to the intensive user of working capital, if it exceeds the sources thus indicating a deficit. These deficits must be detected and set off immediately. This process is known as analysis of working capital. It is a test of short-term solvency. The analysis of working capital becomes necessary to know If the management is using the working capital effectively. If the amount of working capital is adequate. If the current financial position is improving. The needs for the analysis are To maintain adequate working capital at every time. To minimize the cost of short term financing. To choose from the various sources of short term finance and employ them in times of need. To asses the effectiveness of the management of current assets. To study the trends in working capital positions. To maximize the earning per share of the equity shareholders.

3.1.2 Analysis of Working Capital at Vega Auto Accessories.s An important function of the management and the prime duty of the finance department as to maintain an optimum level of working capital has got such an important position because of its nature of revealing the clear cut position of the liquidity of the firm. Though there are several tools of analyzing working capital, the below mentioned are note worthy. Statement of changes in working capital. Working capital ratios. Statement of Changes in Working Capital at Vega Auto Accessories.s Statement of changes in working capital shows the trend to the changes in working capital. This statement is prepared with the help of current assets and current liabilities of two periods. It is comparative statement that is used to calculate increase or decrease in working capital. It also indicates the overall effects of the changes, which shows the trend in changes of working capital and its components.

Ratio analysis
This ratio indicates the firms commitment to meet its short term liabilities 1) Current ratio = Current asset Current liabilites
Current Liabilities 5969927 12229553 10412702 12674434 50466829 Current Ratio 2.5 : 1 2.2 : 1 3.6 : 1 1.9 : 1 3.3 : 1

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Current assets 14640678 26855036 37224483 24386792 166648108

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Current assets Current Liabilities

200304

200405

200506

200607

200708

Interpretation : This graph reveals that current ratio for the year 2003-04
was 2.5 :1 and there was a slight decrease by 0.3 and it was 2.2 : 1 for the year 2004-05 and there was a drastic increase of 1.4 in the year 2005-06 and it was 3.6 :1 and in the year 2006-07 it was decreased by 1.7 and was 1.9 : 1 and it was 3.3 :1 for the year 2007-08.

2) Net working capital turnover ratio :

This ratio includes whether or not working capital has been efficiently utilized in making sales. Net Working Capital Ratio = Net working capital Net assets

Year

Net working capital Net assets

Net W C Ratio

2003-04 2004-05 2005-06 2006-07 2007-08

8670750 14625483 26811780 11712385 116181279

30935665 5022215 65699014 52520791 217966294

0.28 : 1 0.29 : 1 0.41 : 1 0.22 : 1 0.53 : 1

250000000 200000000 150000000 100000000 50000000 0 2003- 2004- 2005- 2006- 200704 05 06 07 08 Net working Capital Net assets

Interpretation : This graph shows that Working Capital turnover ratio for the
year 2003-04 was 0.28 :1 and a minor increase of 0.01 and it was 0.29 : 1 for the year 2004-05 and it increased by 0.12 for the year 2005-06 and it was 0.41 : 1 and the gain came down by 0.19 and it was 0.22 : 1 for the year 2006-07 and for the year 2007-08 it has increased by 0.31 and it was 0.53 : 1.

3) Fixed Asset to Current Asset :

This ratio indicates how much is fixed assets compared to current assets. And these both contribute to make total assets. Fixed Assets to Current Asset = Fixed Assets Current Assets

Year

Fixed Assets

Current Assets

Fixed assets Current asset 0.1 :1 0.9 :1 0.8 :1 1.2 :1 0.3 :1

to

2003-04 2004-05 2005-06 2006-07 2007-08

1629487 23867179 28474531 28133999 51318186

14640678 26865036 37224483 24386792 166648108

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 2003- 2004- 2005- 2006- 200704 05 06 07 08

Fixed Assets Current Assets

Interpretation

: This graph states that fixed assets to current assets in the year 2003-04 was 0.1:1 and there was a drastic increased by 0.8 and it was come to 0.9:1 for the year 2004-05 and there was a slight decrease of 0.1 for the year 2005-06 and it was 0.8:1 and in the year 2006-07 there was a change of 0.4 and it was 1.2:1 for the year 2006-07 and it has been decreased by 0.9 for the year 2007-08 and it was 0.3:1

4 ) Net Profit Ratio : This ratio indicates net profit which is been included in net sales. This is simple than of selling price 100 then it shows what amount is net margin Net Profit Ratio = Net Profit ----------- * 100 Net Sales

Year

Net profit

Net Sales

Net Profit (in %) 45.5% 27.0% 22.5% 19.2% 14.9%

2003-04 2004-05 2005-06 2006-07 2007-08

902370 7888327 10039220 9769945 17063141

19824500 29237017 44680927 50805218 114172323

120000000 100000000 80000000 60000000 40000000 20000000 0 2003-04 2004-05 2005-06 2006-07 2007-08 Net Profit Net Sales

Interpretation :

This graph reveals that net profit ratio was 45.5% in the year 2003-04 and in the year 2004-05 it was decreased by 18.5 and it was 27% and in the year 2005-06 it was decreased by 4.45 and it was 22.5% and again it was been decreased by 3.3 and it was 19.2% for the year 2006-07 and again it was decreased by 4.3 for the year 2007-08 and it was 14.9%.

5) Return on Asset : This ratio is computed to know the productivity of the total asset. Net profit ------------- *100 Net sales

Return on Assets

Year

Net profit

Net Sales

Net Profit (in %) 45.5% 27.0% 22.5% 19.2% 14.9%

2003-04 2004-05 2005-06 2006-07 2007-08

902370 7888327 10039220 9769945 17063141

19824500 29237017 44680927 50805218 114172323

120000000 100000000 80000000 60000000 40000000 20000000 0 2003-04 2004-05 2005-06 2006-07 2007-08 Net Profit Net Sales

Interpretation :

This graph shows that return on assets was 45.5% in the year 2003-04 and in the year 2004-05 it was decreased by 18.5 and it was 27% and in the year 2005-06 it was decreased by 4.45 and it was 22.5% and again it was been decreased by 3.3 and it was 19.2% for the year 2006-07 and again it was decreased by 4.3 for the year 2007-08 and it was 14.9%.

6) Debtors Turnover Ratio : Debtors constitute importance of current assets and therefore, the quality of debtors to a great extent determines a firms liquidity. Total Sales Debtors Turnover Ratio = ----------------Closing debtors

Year

Total Sales

Closing Debtors

Debtors ratio

Turnover

2003-04 2004-05 2005-06 2006-07 2007-08

19824500 29237017 44680927 50805018 114172323

6675512 2200361 6236126 6341956 8256533

3.0 : 1 13.3 : 1 7.2 : 1 8.0 : 1 13.1 : 1

120000000 100000000 80000000 60000000 40000000 20000000 0 2003-04 2004-05 2005-06 2006-07 2007-08 Total sales Closing Debtors

Interpretation

: This graph states that debtors turnover ratio for the year 2003-04 was 3.0 : 1 and in the year 2004-05 it was increased by 10.3 and it was 13.3 : 1 in the year 2005-06. It was dropped by 6.1 and it was 7.2 : 1 and there was a slight increase of 0.8 in the year 2006-07 it was 8.0 : 1 and for the year 2007-08 it has increased by 5.8 and it was 13.8 :1.

7) Debt Collection Period :

It indicates the extent to which debts have been collected in time it gives the average debt collection period. Months in a year Debt collection period = -------------------Debtors turnover

Year

Months in a year

Debtor turnover ratio 3.0 13.3 7.2 8.0 13.1

Debt Collection period

2003-04 2004-05 2005-06 2006-07 2007-08

12 12 12 12 12

4.0 0.9 1.7 1.5 0.8

14 12 10 8 6 4 2 0 2003- 2004- 2005- 2006- 200704 05 06 07 08 Debtors turnover ratio Months in a year

Interpretation

: This graph reveals that debt collection period for the year 2003-04 it was 4.0 and dropped by 3.1 and it was 0.9 for the year 2004-05 and slight increase by 0.8 and it was 1.7 for the year 2005-06 and it was decreased by 0.2 in the year 2006-07 and it was 1.5 for the year 2006-07 and it decreased by 0.7 for the year 2007-08 it was 0.8.

8. Material Consumed Ratio

This ratio indicates at what extent material is been consumed in net sales. Material Consumed Material Consumed ratio = ------------------------ * 100 Net Sales

Year

Material Consumed Net Sales

Material Consumed in %

2003-04 2004-05 2005-06 2006-07 2007-08

5070929 8014920 17286978 13131411 61920176

19824500 29237017 44680927 50805218 114172323

25.6% 27.4% 38.7% 25.8% 54.2%

120000000 100000000 80000000 60000000 40000000 20000000 0 2003-04 2004-05 2005-06 2006-07 2007-08 Material Consumed Net sales

Interpretation :

This graph states that material consumed ratio was 25.6% for the year 2003-04 and in the year 2004-05 there was a slight increase of 1.8% and it was 27.4% and there was a high increase for the year 2005-06 by 11.3 and it was 38.7% in the year 2006-0 it was dropped by 12.9 and it was 25.8% there was high increase by 28.4 for the year 2007-08, it was 54.2%.

9). Stock turnover ratio. This ratio indicate how much of stock/ Inventory is been invested and what is ratio contributing to current ratio contributing to current assets. Stock to Current assets = Stock Current asset

Year

Stock

Current asset

Stock to Current asset

2003-04 2004-05 2005-06 2006-07 2007-08

5565661 20034869 27928637 15750729 78367649

14640678 26865036 37224483 24386792 166648108

0.38 : 1 0.75 : 1 0.75 : 1 0.65 : 1 0.47 : 1

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Stock Current assets

2003-04 2004-05 2005-06 2006-07 2007-08

Interpretation :

This graph shows that stock to current asset was 0.38 : 1 for the year 2003-04 and in the 2004-05 there was a great increase of 0.37 and it was 0.75 : 1 and there was no change in the year 2005-06 and it was 0.75 : 1 and in the year 2006-07 there was slight decrease of 0.10 and it was 0.65: 1 for the year 2007-08 there was decrease by 0.18 and it was 0.47 : 1.

10) Debtors to current ratio : This ratio indicates that what extent of debtors contributed current assets. This amount has yet to be received from customer and it helps to make future planning of business. Debtors Debtors to current asset = -------------Current assets

Year

Debtors

Current asset

Debtors current asset

2003-04 2004-05 2005-06 2006-07 2007-08

6675512 2200361 6236126 6341956 8256533

14640678 26865036 37224483 24386792 166648108

0.46 : 1 0.08 : 1 0.17 : 1 0.26 : 1 0.04 : 1

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Debtors West

2003-04 2004-05 2005-06 2006-07 2007-08

Interpretation : This graph reveals that debtor to current assets for the year
2003-04 was 0.46:1 and then it dropped down by 0.38 in the year 2004-05 and it was 0.08:1 and there was a slight increase by 0.09 and it was 0.26:1 in the year 2006-07 for the year 2007-08 it has been dipped down by 0.22 and it was 0.04:1.

11 ) Cash to current assets :

This shows how much amount of cash a company has in their hand and in the bank and what is cash contribution to current assets. Cash Cash to Current assets = ----------Current assets

Year

Cash

Current asset

Cash to current asset

2003-04 2004-05 2005-06 2006-07 2007-08

1474728 2926749 361982 401125 9010604

14640678 26865036 37224483 24386792 166648108

0.10 : 1 0.11 : 1 0.01 : 1 0.02 : 1 0.05 : 1

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Cash Current assets

2003- 2004- 2005- 2006- 200704 05 06 07 08

Interpretation:

This states that cash to current assets was 0.10:1 for the year 2003-04 and in year 2004-05 it was slightly increase by 0.01 and it was 0.11:1 and it was dipped down by 0.10 and it was 0.01:1 for the year 2005-06 and it increase by 0.01 in the year 2006-07 and it was 0.02:1 and there was a slight increase by 0.03 for the year 2007-08 it was 0.05:1.

12 ) Loan to Current assets : This includes that loan taken by the company to meet its short term obligation and of course contribution to current assets. Loans & advances Loan to current assets = ---------------------Current assets

Year

Loans and Advances 924775 1693056 2697737 1892981 70713319

Current asset

Loan and Current assets

2003-04 2004-05 2005-06 2006-07 2007-08

14640678 26865036 37224483 24386792 166648108

0.06 : 1 0.06 : 1 0.07 : 1 0.08 : 1 0.42 : 1

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Loans and Advances Current assets

2003- 2004- 2005- 2006- 200704 05 06 07 08

Interpretation :

This graph shows that a loan to current assets was 0.06:1 for the year 2003-04 and in the year 2004-05 it was constant there were no change and it was 0.06:1 and in the year 2005-06 there was a slight increase by 0.01 and it was 0.07:1 and again there was normal increase of 0.01 and it was 0.08:1 for the year 2006-07 and then there was a high increase by 0.34 for the year 2007-08 and it was 0.42:1.

13) Investment to current assets:

This is investment made by the company outside not inside the company so as to earn additional income and also treated as current assets and its contribution to current assets. Investments Investment to current assets = ----------------------Current assets

Year

Investment

Current asset

Investment to current assets

2003-04 2004-05 2005-06 2006-07 2007-08

263103 263280 263471 263678 627838

14640678 26865036 37224483 24386792 166648108

0.80 : 1 0.98 : 1 0.71 : 1 0.08 : 1 0.03 : 1

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Investment Current assets

2003-04

2004-05

2005-06

2006-07

2007-08

Interpretation : This graph shows that investment to current assets for the
year 2003-04 was 1.80: 1 and it was been decreased by 0.82 for the year 200405 and it was 0.98:1 and again there was slight decrease of 0.27 for the year 2005-06 and it was 0.71:1 and in the year 2006-07 it was increased by 0.37 and it was 1.08: 1 and for the year 2007-08 it has decreased by 1.05 and it was 0.03:1.

14) Proprietors to current assets : It established relationship between the proprietors fund to current assets. Proprietors Proprietors to current assets =--------------------Current assets

Year

Proprietor fund

Current asset

Loan and Current assets

2003-04 2004-05 2005-06 2006-07 2007-08

504000 504000 504000 504000 504000

14640678 26865036 37224483 24386792 166648108

0.03 : 1 0.02 : 1 0.01 : 1 0.02 : 1 0.03 : 1

180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0

Proprietors fund Current assets

2003- 2004- 2005- 2006- 200704 05 06 07 08

Interpretation :

This graph states that proprietors to current assets was 0.03 for the year 2003-04 and in the year 2004-05 it was normally decreased by 0.01 and it was 0.02 and in the year 2005-06 it was again dipped by 0.01 in the year 2006-07 and it was 0.02 and for the year 2007-08 it has decreased by 0.01 and it was 0.03.

15 ) Proprietors fixed assets : It establishes relationship between the proprierors fund and the fixed assets. Proprietors fund Proprietors to fixed assets = --------------------Fixed assets

Year

Proprietor fund

Fixed asset

Loan and Current assets

2003-04 2004-05 2005-06 2006-07 2007-08

504000 504000 504000 504000 504000

1629487 23867179 28474531 28133999 51318186

0.03 : 1 0.03 : 1 0.02 : 1 0.02 : 1 0.09 : 1

60000000 50000000 40000000 30000000 20000000 10000000 0 2003-04 2004-05 2005-06 2006-07 2007-08 Proprietors fund Fixed assets

Interpretation :

This graph shows the proprietor to fixed assets was 0.03:1 for the year 2003-04 and it was slightly decreased by 0.01 for the year 2004-05 and it was 0.03:1 and was constant for 2005-06 it was 0.02:1 and there no changes in the year 2006-07 again it was 0.02:1 and for the year 2007-08 it has increased by 0.07 and it was 0.09:1.

Vega Auto Accessories Pvt. Ltd , Belgaum

Particulars Source of Fund Share holders Fund Share capital Reserve and surplus Deferred Tax Liability Loan Funds Secured Loans Unsecured Loans Total Application of Funds Fixed Assets Gross Block Less: Deprecieation Investments

Balance sheet For the year ending 2006 Amount

Amount

900000.00 2373251.13 3273251.13 477435.09 15770397.95 13694165.69

29464563.57 33215249.79

28796534.23 8956916.53 19839617.70 21150.00

Current Assets, Loans & Advances Stock in hand Sundary Debtors Cash & Bank Balances Loans & Advances Less : Current Liabilities & Provisions Net Current assets Miscellaneous Expenditure Total 18165462.86 4585657.67 883743.45 6619639.80 30254503.78 16900021.69 1354482.09 Nill 33215249079

Vega Auto Accessories Pvt. Ltd , Belgaum Balance sheet For the year ending 2007 Particulars Amount Source of Fund Share holders Fund Share capital Share Application money Reserve and surplus Deferred Tax Liability Loan Funds Secured Loans Unsecured Loans Total Application of Funds Fixed Assets Gross Block Less: Deprecieation Investments Current Assets, Loans & Advances Stock in hand Sundary Debtors Cash & Bank Balances Loans & Advances Less : Current Liabilities & Provisions Net Current assets Miscellaneous Expenditure Total 40417244.00 5337949.59 467259.65 1239623.79 58602077.03 22468388.84 33543736.23 12649739.53 900000.00 600000.00 2158470.50

Amount

3658470.50 374212.09 14215737.60 38800414.94

53016152.30 57048834.89

20893996.78 21150.00

36133688.19 Nill 57048834.89

Vega Auto Accessories Pvt. Ltd , Belgaum Balance sheet For the year ending 2008 Particulars Amount Source of Fund Share holders Fund Share capital Share Application money Reserve and surplus Deferred Tax Liability Loan Funds Secured Loans Unsecured Loans Total Application of Funds Fixed Assets Gross Block Less: Deprecieation Investments Current Assets, Loans & Advances Stock in hand Sundary Debtors Cash & Bank Balances Loans & Advances Less : Current Liabilities & Provisions Net Current assets Miscellaneous Expenditure Total 66503735.61 5745850.97 8473911.12 10620160.79 91343658.49 32729406.87 38577840.23 16391457.53 1500000.00 0.00 7688530.32

Amount

9188530.32 288196.09 14312985.97 57032071.94 71345057.91 80821784.32

22186382.70 21150.00

58614251.62 Nill 80821784.32